Monday, August 31, 2015

News Note: US Budget Deficit Situation Improves

While the US debt situation is problematic and everyone agrees is not sustainable in the long term, an increase in revenues has eased the short term burden. Reuters provides an update in this article. Below are some quotes from the article.


"The U.S. budget deficit is likely to fall by $60 billion in 2015 due to strong revenue gains, the Congressional Budget Office said on Tuesday, enabling the government to stave off default without a debt limit hike perhaps through early December.
The CBO said it now estimates a $426 billion deficit for fiscal year 2015, down from its $486 billion forecast made in March. It also forecast a fiscal 2016 deficit of $414 billion, a reduction of $41 billion.
The new forecast would bring the deficit to its lowest dollar amount since 2007, and as a 2.4 percent share of U.S. economic output, it would be below the 50-year average.

The deficit peaked at $1.4 trillion in 2009 and shrank to $485 billion in 2014."    . . . . . .

"The CBO also revised its forecast for real gross domestic product growth for 2015 to 2.3 percent from 2.8 percent, bringing it in line with private forecasters. The data used for the changes, however, was locked on July 7, before the start of a global sell-off in financial markets sparked by worries about China's economic slowdown.
The revised forecasts do not change the CBO's view that based on current tax and spending laws, deficits will start to rise again later in the decade due to the costs of caring for the rapidly aging Baby Boom generation, topping $1 trillion again by 2025."
Added note: Along with this news we have GDP for the 2nd quarter of 2015 revsised sharply higher and the Atlanta Fed GDP Now with a higher 3rd quarter GDP estimate than they had a few weeks ago. None of this news supports the idea that a severe crisis is imminent. Over the next 2-3 months, someone is going to be significantly wrong on the severe crisis forecast. Either we get one and the mainstream analysts are taken by surprise or we don't get one and the alternative analysts projecting one are surprised. We will follow it here to see what actually happens. If we get no major crisis by year end 2015, it will likely be time to re-evaluate the future of this blog, at least in terms of the frequency of articles posted.

Jim Rickards: Latest Interviews on Fed Rate Hike - Currency Wars

Jim Rickards did a couple of new TV interviews in the past week talking about the prospects for a rate hike by the Fed, continuing currency wars, and the recent market volatility. One interview was on CNBC and the other on Bloomberg. 


Thursday, 27 Aug 2015 | 8:12 PM ET
Investors should play it safe and stay away from publicly-traded stocks that have more room to fall further, warns Jim Rickards, chief global strategist at West Shore Funds.

The Bloomberg interview is in two parts. 

The first on inflation - click here to watch

James Rickards, portfolio manager at West Shore Group, discusses the Federal Reserve's inability to spark inflation and the cross-influence of markets and the Fed. He speaks on "Bloomberg Markets." (Source: Bloomberg)

The second is on the prospects for a Fed rate hike - click here to watch

James Rickards: Why a Fed rate hike is off the table. Jim discusses the outlook for Fed policy with Bloomberg's Mark Crumpton and Matt Miller on "Bloomberg Markets." (Source: Bloomberg)

Sunday, August 30, 2015

The Economist: Bitcoin Battles

It seems that Bitcoin is not exempt from power struggles. This article in the Economist describes the "geek war" now fully underway. While Bitcoin has a devout following in its niche, we have long maintained here that it will never obtain widespread adoption for a variety of reasons. For those who do follow it, below are some quotes from the article in The Economist.


“FEDERAL Reserve deeply split. Renegade group of board members to create separate American dollar.” Such a headline seems highly unlikely, but this in essence is what is happening in the land of Bitcoin, a digital currency. On August 15th two of its main developers released a competing version of the software that powers the currency. With no easy way to resolve feuds, some are warning that this “fork” could result in a full-blown schism."

"The dispute is predictably arcane. The bone of contention is the size of a “block”, the name given to the batches into which Bitcoin transactions are assembled before they are processed. Satoshi Nakamoto, the crypto-buff who created the currency before disappearing from view in 2011, limited the block size to one megabyte. That is enough to handle about 300,000 transactions per day—suitable for a currency used mainly by geeks, as Bitcoin once was, but nowhere near enough to satisfy the growth aspirations of its boosters. Conventional payment systems like Visa and MasterCard can process tens of thousands of payments per second if needed."

"By how much and when to increase this limit has long been a matter of a heated debate within the Bitcoin community. Overlapping cabals of “core maintainers” and “main developers” serve as de facto keepers of the currency, especially in Mr Nakamoto’s continued absence. Now one camp wants to increase block sizes, and do it soon. Otherwise, they argue, the system could crash as it runs out of capacity as early as next year. Transactions could take hours to confirm and fees could rocket, warns Mike Hearn, a leading Bitcoin developer. “Bitcoin would survive,” he wrote in a blog post in May, “but it would have lost critical momentum.

My added comments:

A reader here who I view as an expert on this topic explained to me last year how Bitcoin would run into problems like this (and others related to the enormous power consumption it takes to run the system). Bitcoin will probably remain an option for those who feel a need to try and bypass the current banking system, but this is only going to be a tiny fraction of the public in my view. Also, they can't really bypass the system anyway because when they try to convert Bitcoins back into something usable (to spend them), the system will capture those transactions for tax collection purposes since most nations treat Bitcoin gains and losses like capital gains (and not like a currency).

Unless something happens to shake confidence on broad scale in the present banking system, most people will just consider this too big a hassle to fool with. And even then, they would be more likely to revert to more traditional forms of money like precious metals in my view.

Added note 9-1-15: Bloomberg runs this article about the frenzy to try and adapt the "blockchain" technology behind Bitcoin to other uses in the financial industry. At first glance if you know very little about all this, it sounds as if this could be some kind of technology breakthrough for the future. When I ran this article past an expert though, I learned a very different story. The cost per transaction using "blockchain" technology is absurdly high for the benefits it produces. To produce a blockchain transaction it takes a lot of capital investment in equipment and electrical power per transaction.

There is already technology designed which far surpasses this in terms of cost per transaction, speed of transactions, and overall system efficiency per transaction (it's not even close). The "blockchain" technology touted in this Bloomberg article was described to me as an obsolete 20 years behind the curve system in comparison to what exists as an alternative.

Is Everyone Positioning for "The Blame Game?"

It's too early to tell if all this recent market volatility is the start of a global crisis along the lines that Jim Rickards and others believe will eventually happen. Many are forecasting that a major crisis will start up this fall in the September-October time frame. Many predictions like this have not panned out previously, so all we can do is follow events and see what happens.

One thing that is a little unsettling has been happening though. If you just follow the news accounts, you can see that everyone is seemingly positioning to try and blame someone else if things go bad. Below I have written a brief paragraph that illustrates this using links to various recent news articles. 

This is truly a strange financial world we live in. For years we have had global "QE" which is credited with preventing a global depression. But recently the St. Louis Fed said "QE" did not achieve its objectives. Now we are supposed to worry about "QT" in China. In its last annual report the BIS said we have reached a state where "the unthinkable" is becoming viewed as normal and routine (see page 3). If all this eventually blows up into a huge global crisis (bubbles start popping), the finger pointing is going to be endless. The US will blame ChinaChina and the BRICS will blame the US Fed. The IMF will probably blame both the Fed and China while being blamed themselves for not giving any early warningThe BIS and the IMF will probably say "we told you so" because of all the systemic risk warnings they have issued (even though never forecasting an actual major crisis).  

If it does blow up, someone is going to have to try and fix the mess. Who will the public trust at that point with everyone blaming everyone else? Jim Rickards feels the IMF will emerge as the entity to solve the crisis using the SDR as new global reserve currency. Will the public buy into that if they think the central banks and global institutions failed them once again? Can the blame successfully be directed elsewhere like China for example? (Watch Donald Trump say China 234 times in this video --- Here he blames China for the recent stock drop). Not to be outdone, notes the blame game and then joins in by blaming Donald Trump for the market plunge.

In the US we are seeing a huge surge of political support for Donald Trump, mostly because many people are fed up with those running things now in both major parties. Just imagine how fed up they will be (and how many millions more of them will join in) if we get another major crisis and we have everyone trying to blame someone else. I hope all this does not happen because it could get very ugly if it does. There is a real possibility that everyone could lose, at least until some kind of new stable financial and monetary system emerged. 

It's a good idea to try and be prepared for anything just in case starting with the September-October time frame coming up since so many people are expecting something then. Here, we just admit we don't know and will follow events to see what actually happens.
My added comments:

It's natural for people to try and deflect blame for things that go wrong. The fact that these various parties have already been positioning to point the finger of blame somewhere else does not guarantee we will have a major crisis. But it's not a good sign either. If everyone felt sure things will be fine, we would not be seeing this.

Saturday, August 29, 2015

Benjamin J. Cohen - The Value of China's Devaluation

Writing an article that appears in Project Syndicate, Benjamin J. Cohen offers his view that the recent move by China to devalue the yuan may be just another step taken to get it into the SDR currency basket. Below are a few quotes from his article.


Earlier this month, global financial markets nearly imploded. From East Asia to Western Europe, currencies swooned and equity prices tumbled – all because of China’s decision to allow a modest devaluation of its currency, the renminbi. China’s economy is on the brink of collapse, pessimists warned. A new era of currency wars is about to be unleashed, doomsayers chimed in. To call this an overreaction would be a gross understatement.

Admittedly, the Chinese economy has been slowing, not least because of a sharp decline in the country’s exports. And devaluation of the renminbi could be viewed as an aggressive move to reverse the export slide and restore domestic growth – a move that could prompt competitors in Asia and elsewhere to push down their exchange rates as well, triggering an all-out currency war. So, in this regard, investor fears were not without merit.

But how serious was the threat? In reality, China’s devaluation was puny – by the end of the week, less than 5% in all. Compare that to the euro’s 20% drop so far this year, or the yen’s 35% dive since Japan embarked on its “Abenomics” reform program in late 2012, and it is clear that overblown headlines about the renminbi’s “plunge” were woefully misleading. Had China really wanted to grab a bigger share of world exports, it is hard to imagine that its policymakers would have settled for such a modest adjustment.

China’s real motivation seems to be more far-sighted.  . . . . . . 

Click here to read the full article in Project Syndicate

Added note: Stephen Roach weighs in on China in his new article that you can read here.

Added note: Raghuram Rajan (India ) says don't blame only China for stock rout

Added note: Alasdair Macleod provides his take on China's moves in the global chess game

Added note: Here is Jared Collins take on the move by China (agrees with Benjamin Cohen)

Added note: CNBC - Now we have "QT" in China?

Friday, August 28, 2015

Financial Inclusion: A topic that we will hear more and more about

In the past few years there has been an ongoing effort to improve financial inclusion around the world. Financial inclusion is the delivery of financial services at affordable costs to disadvantaged and low income sections of society. In a recent speech posted on the Bank for International Settlements web site, Dr. Zeti Akhtar Aziz (Governor of the Central Bank of Malasia) talked about progress in this effort. Below are the concluding remarks to his speech on the topic.


Our collective efforts in advancing financial inclusion have yielded many significant achievements. The Global Findex Database 2014 will be an important contribution to more optimal and impactful financial inclusion policy making and implementation. Bank Negara Malaysia would like to congratulate the World Bank Group on this accomplishment. We would also like to reaffirm our unwavering commitment to the financial inclusion cause and look forward to deepening our cooperation with all stakeholders to fulfil the promise of greater financial inclusion, thereby bringing hope and better opportunities to our communities.
One of the big benefits to affordable financial inclusion is that it makes it easier for those who have migrated away from their own country (to find higher wages) to send money back home. These remittances are a huge and growing part of the global economy. Dilip Ratha, Manager of the Migration and Remittances team at the World Bank gave an interesting Ted Talk on this topic which you can view here or watch below. Improvements in payments technology is helping to lower costs for many who use remittances. Mr. Ratha points out that ALL of the funds sent by remittance reach those who need it directly as opposed to government aid programs where this is often not the case.

Thursday, August 27, 2015

Greg Hunter Interviews Jim Sinclair

With global markets having had a strong selloff and showing massive volatility, Greg Hunter interviews Jim Sinclair to get his take on things. Jim is widely respected for having called the top of the gold market way back in 1980. In the early 2000's when gold was trading under $300, he predicted that gold would hit $1650. Gold actually exceeded his prediction moving to $1900. Jim's blog site was one that started me on my own journey to try and learn more about all this over a decade ago.

In recent years Jim has done very few public interviews. Now he is stepping forward because he feels the market drop we have just seen is a warning signal of a much deeper crisis to come. Jim talks very openly in this interview and if you know him at all you know he cares very much about what happens to the average person. He has been kind to offer me his thoughts by email for many years. This is an interview we will need to revisit in November to see how things are going.

Below are some quotes from the summary of his interview. You can view the interview here on Greg Hunter's site.


"Legendary gold expert Jim Sinclair says what is going on right now in the stock market is just the warm-up act. Sinclair contends, “This is a pre-crash, and we are not making it through September without the real thing. Everybody is on credit. Main Street is on credit. This seems to be a bubble of historical proportion when it comes to the amount of money supporting the accepted lifestyles as being the new normal. Raising interest rates is impossible today. The market is so fragile. Nothing can come out that causes people any concern or derivatives any change, nothing whatsoever. We are going through a period of time where expecting nothing meaningful is a dream. These are times never experienced in financial history. . . .It is very possible that we are going to have a super civilization change. ”

"The US Plunge Protection Team is losing control of the markets, and Sinclair warns, “They got the dickens scared out of them. They actually backed off providing the funds necessary. . . . That’s your warning. The warning is markets can overrun plunge protection teams. Markets can and will overrun the manipulation of metals and currencies. The market will overrun the false strength in the US dollar. The idea that a lift in interest rates would be beneficial to the dollar is absolutely incorrect. We do know the limits of the Plunge Protection Team, and we do know the omnipotent power of the Fed is a total fallacy.”
On gold, Sinclair says, “I didn’t call the top in gold in 1980 because of any kind of a system. I was told, I acted on what I was told.”
My added comments:
Jim is certainly not alone in forecasting a severe crisis coming this fall (September-October time frame). Bill Holter who writes on Jim's blog is one who agrees. Because I follow dozens of sites all over the internet in doing research for this blog, I am pretty well aware of the wide range of views out there on this. There are a number of respected analysts who agree that this fall we will see a more severe crisis (here is another example). Many religious based sites are expecting this due to a number of dates with historical religious significance coming up soon (Shemitah is one one example). 
Experts we feature here often like Jim Rickards and Nomi Prins are also expecting a severe crisis, but they do not try and put a specific time frame on it. They simply think it could begin at any time in the next 2-3 years. So they will not be surprised if we get one this fall, but will not be surprised if it comes later than that either.
Other experts we talk with do not expect a major crisis any time soon or believe that the tools exist to manage one if it does happen. This conflicts directly with Jim Sinclair's view above. He believes the crisis is coming soon and will not be manageable. Jeffrey Saut of Raymond James offers a more optimistic view of the market on King World News here
We do not try to make forecasts here. What we try to do is present a variety of credible expert views and let readers decide for themselves. Clearly, we will have an opportunity in the next couple of months to test out the severe crisis forecasts being made for the September-October time frame. By the end of October, we will know if those forecasts were accurate or not.
In regards to the two big questions we are following here:
1) Will we get another major financial crisis bigger than the 2008 crisis?
2) Will the SDR use at the IMF become a global reserve currency?
we will follow events this fall to see what happens. If we do get a major global crisis bigger than 2008, we need to see how that is resolved. Will the SDR used at the IMF be put forward as the answer? Jim Rickards predicts it will. Jim Sinclair predicts it will not. Will gold come into play or not?
Readers here need to pay close attention to what solutions are put forward to resolve a major global crisis if we get one and watch to see how the public reacts to the proposed solution. Will they accept it or reject it? That is what we are following here.

Wednesday, August 26, 2015

Meanwhile, Back in Greece

We continue to view Greece as a kind of real world live experiment that can show us on a small scale how the problem of  overwhelming sovereign debt will be dealt with. Since the world has a big problem with overwhelming sovereign debt, any clues we can get as to how this will be resolved are appreciated. CNBC runs this article on the latest developments in Greece. Below are some quotes and then a few added comments.


"Europe spent months trying to crush Alexis Tsipras. But now that Greece's leftist prime minister has called a snap election and is seeking a mandate for the tough new bailout program he negotiated with his country's creditors, Europe, oddly enough, may find itself invested in his success.

Greece never fails to surprise, and Mr. Tsipras's turbulent eight-month tenure has proved he is rarely predictable. But the man many European leaders once regarded as a populist wrecking ball is now presenting himself as a figure who can deliver pragmatism and stability — and carry out the sort of austerity program he once inveighed angrily against."
. . . . 
"The latest twist by Mr. Tsipras was met with cautious optimism on Friday by some European commentators even as his surprise move again tossed Greece into political turmoil. On Friday, a faction of hard-line leftists split from Mr. Tsipras's Syriza party and formed a new party, vowing to resist austerity and possibly even lead Greece out of the eurozone."     . . . . 
"Some economists also warned that the uncertainty surrounding the elections, including the possibility that the proposed Sept. 20 election could be pushed back, could revive the sort of public anxiety that earlier this year destabilized the broader economy and spurred a run on Greek banks."
. . . . .
"Yet mistrust for Mr. Tsipras is deep among German officials, and some lawmakers were suspicious that the Greek leader might use a new election to revoke the bailout program he signed last month. "Mr. Tsipras must not be allowed to deviate from the path of reform with such a maneuver," Manfred Weber, the head of the center-right European People's Party, told the tabloid Bild."
. . . . . .
"But Angelos Handris (Greek citizen), 55, who manages a street kiosk near central Athens, bemoaned the election as "the last thing we need," and sharply criticized Syriza. "They promised the world, they messed up, they closed the banks, and now they want to drag us to elections," said Mr. Handris, a supporter of the conservative New Democracy Party."
My added comments: The situation in Greece continues to be a hot mess even as it appears that they are crawling towards some kind of agreement. The article above clearly illustrates how hard it is to get all the various factions to work together on any type of solution. Keep in mind the IMF is still balking at joining in and wants to see both sides give in some more before they will agree to any more lending. All these problems and conflicts just for Greece.
We can magnify and multiply these same kinds of problems many times over at the global level. Just imagine how hard it will be to get global agreement to any proposed solutions that may be offered to another global financial crisis. The competing powerful special interests at that level are enormous. 
What we have seen in Greece was that the people elected a government to stand up to the creditors they viewed as too oppressive. The government did that which led to direct conflict. Both sides dug in and the creditors were quite happy to use hard ball tactics (cutting off the people from their own money in the bank). Once the crisis become real to people, they quickly caved in and allowed the government to agree to the very program they had sworn they would never agree to.
Beyond all this, the "solution" does not really fix the problem or even admit to it (that Greece's debt is too large to ever be paid off in relation to the size of its economy). The IMF is willing to admit this, but the proposed solution from the EU does not.
If Greece is a real world live experiment as to how things will go at the global level if we get another major financial crisis worse than 2008, expect some difficult times ahead. For other examples of how hard it is to get global cooperation, read our Part I and Part II articles on this topic.

Matthew McBride and SDRF University

Last Friday evening I had the privilege of talking with Matthew McBride by skype. Matthew lives in Australia so I am grateful we have things like skype to make communication easier. Matthew, like many of us, has become interested in the issues related to potential monetary system change and what might happen in the future in that regard. He described to me what his vision is for SDRF University.

Below is a brief summary of our discussion and also a contact email address for anyone that might be interested in talking about his with Matthew. He is very friendly and wants to hear from others interested in this topic. 


Matthew has joined with Willem Middelkoop, Jared Collins, and Velina Tchakarova to form what he is calling SDRF University. Matthew feels that the SDR and the IMF use of it are topics that are not well covered in traditional university finance or economics courses. As the world deals with all the problems and issues existing in the present monetary system, Matthew feels there is a need for the public to be better informed on this very important topic. I certainly agree and try to help out with that here on the blog.

It's impossible in blog articles to go into depth on this subject however. Matthew has put together a full course (much as you might take in an actual university setting) that offers an in depth look at these issues. Matthew was kind to offer me a look at the course. I feel it is very well done and offers a very good in depth analysis for anyone interested. 

Right now there are not throngs of people seeking to learn more about the IMF and the SDR :-) Matthew and I both feel that could change if Jim Rickards forecast of another major financial crisis worse than 2008 does happen. Jim predicts that if we get such a crisis, the IMF will step forward and propose to solve the problem at the global level using the SDR. That would clearly lead to many more people wanting to learn more about this in order to have an informed opinion about it. People will need good sources of information and Matthew hopes SDRF University can help fill that need.

Matthew also has a lot of ideas on how to encourage people to dig in to this topic and discuss it with others who have similar interest. He would enjoy hearing from anyone that has interest in this. He also would like to hear ideas on how to encourage exchange of information between those who want to learn more and share their thoughts. You can contact Matthew at this email address directly if interested:

I will follow up on this from time to time as the idea moves forward and more information is available.

Tuesday, August 25, 2015

BRICS Post: South China's Sea's Simmering Crisis

On the surface, this article in the BRICSPOST does not really deal with issues related to the global monetary system. However, it is another example of how political differences make it more difficult to achieve global cooperation between nations. 

Earlier we wrote blog articles on how global cooperation is easier to talk about than to actually achieve (see Part I here,  see Part II here). This article in the BRICSPOST does fit in with that theme. Below are some quotes from the article.


"The standoff between China and the US in the South China Sea has intensified in recent months largely due to tit-for-tat maneuvering by both countries.
Washington has vehemently criticized China’s land reclamation in this strategic body of water.
It is also concerned about the implications of US primacy challenged in the maritime domain and the perceived undermining of America’s credibility among its regional allies.
For its part, Beijing accused the US of “militarizing” the South China Sea by deploying more military assets and conducting joint drills with regional allies in a rampant manner.
Indeed, a form of strategic competition between China and the US has increasingly come to define the core of the South China Sea disputes."

Enter a new player on the scene
In late July, Japanese Prime Minister Shinzo Abe signaled that Japan could conduct minesweeping operations in the South China Sea. It indicated a desire of the Abe administration to push forward with its ambitious national security strategy in virtue of the South China Sea issue."
. . . . . . 
"Therefore, the South China Sea issue is gradually becoming a thorny problem that threatens the relationship among Beijing, Washington and Tokyo."

Click here to read the full BRICSPOST Article

My added comments: Keep in mind these kinds of news items when you see the western media and politicians blame China for the global stock market dive. We have had all the following events happen this year that may or may not relate to what is going on now:

- China and BRICS tout new AIIB and BRICS Bank as alternatives to the IMF and World Bank. Many Eurozone nations (including the UK) join and the US is said to be embarrassed by this.

- China moves to increase global use of the yuan as alternative to the US dollar (including a big push to get the yuan included into the SDR basket at the IMF). China (and Russia) increase gold buying.

- IMF announces that a decision has been made to delay changing the SDR currency basket (and therefore delay adding the yuan) until September 2016.

- Chinese stock markets start into a nose dive (some suspect the US may have tried to help trigger the fall). This after reports that China had hacked into US government data bases.

- Global markets go into a dive and western media and politicians mostly blame China for it. Donald Trump in particular makes a big issue out of it (says, I told you so on China).

Are these events connected or not?  We report, You decide.

Monday, August 24, 2015

Jim Rickards: Contagion is Spreading Through the Markets

Jim Rickards provides this new article that talks about a point we have emphasized here quite a bit. That being that we live in a globally interconnected world now. The phrase we use here is, a problem anywhere can lead to a problem everywhere. Below are some quotes from Jim's new article.

"Look around. What’s happening is a stark reminder of the interconnectedness of markets, and the power of contagion. The emerging markets crisis of 2015 finally reached U.S. shores.
We are now living in the second age of globalization. The first age began in 1870 and ended in 1914. As is the case today, it was characterized by strong economic growth, technological innovation, and global financial linkages. That first age saw the invention of the telephone and airplane, and vast expansion of nascent networks of railroads and transoceanic shipping."
. . . . 
"The second age of globalization began in 1989 with the fall of the Berlin Wall, and has continued until today. Like the first age, this period has seen enormous technological innovation and deep financial integration. Today the inventions are the internet, derivatives and inexpensive jet travel. Still, some things never change. JPMorgan, the latest incarnation of the House of Morgan, sits in New York, distributing bonds for emerging markets to investors in London.
The great unknown is whether the second age of globalization will also come to ruin in a new catastrophe equivalent in disruptive power to the First World War. Time will tell. Yet, my dynamic systems analysis of globalization using complexity theory, and indications and warnings, says a catastrophic collapse is just a matter of time.
Only the exact time and the specific snowflake that starts the avalanche remain to be seen. This kind of systemic analysis is the primary tool we use to keep investors ahead of the catastrophe curve."
. . . . .
"Beginning a few months ago, many Wall Street analysts assured us that China’s problems were China’s problems, and would not spread outward. They told us growth in the U.S. was solid, and that emerging market collapses in Russia, Brazil, China, Turkey, and elsewhere were due to local factors and conditions that would not impact the U.S.
This Wall Street advice was nonsense at the time and that nonsense is now seen for what it was. How could the world be closely linked during the expansion phase, yet somehow de-linked during a contraction? It can’t.
The global slowdown has now come home to roost in U.S. markets. This is something we’ve been warning you about for months. We’ve consistently said that U.S. growth was too weak to support an interest rate increase, and that Janet Yellen’s continual threats to raise rates were only adding to the weakness."
My added comments: If you follow Jim Rickards you will quickly see that he does not view this huge global market selloff as just another normal correction. It's obvious he sees it as something potentially much more. We will follow it here.

Here are some tweets from Jim Rickards on his twitter feed today:

on gold

on West Shore Funds conference call

on his call that the Fed cannot raise interest rates

on the options left for the Fed now

his response indicating the market action today is important

Here is a quote from an earlier email article Jim sent out:

"In early August, China threw in the towel on tight monetary policy, but it was too late. China followed Yellen too far down a dead-end road and has no easy way out. Yellen is still talking tough on a U.S. rate hike even as U.S. markets melt down. The problem with obsolete forecasting models is that you are always the last to know what’s going on. The entire world is caught in a deflationary vortex caused by botched central bank forecasting that led to excessive ease followed by ill-timed tightening."

Added note: Twitter comment from Willem Middelkoop

With (infinite) QE and a coming collapse/Restructuring of Sovereign bonds, stocks (and hard assets like gold/real estate) are safe havens ..

Bill Holter provides this update tonight. 

His take is that the selloff is far more than the normal correction of an overbought market. He believes today was important because it may have undermined public confidence in the ability of the authorities to keep the system stable. He says confidence is the only thing holding the system together.

News note:

Independent UK - Former Gordon Brown Adviser says stock up on canned goods 

News Note: Markets Need to be Watched Closely

By now it's obvious that the global equities selloff is continuing. It is always hard to know how to react to things like this when they start up. We never know if we are just seeing a sharp correction to a market that is overbought or we are seeing the start of something potentially worse.

Below is  a bullet point list of things I feel are important to watch closely as we follow this event:

- Do authorities have to resort to unusual methods to stem market selling (banning short sales, activating "circuit breakers" to try and slow selling, closing markets early, etc)

- Watch the prices of commodities like oil and copper - continued falling prices could be a warning that severe deflation is coming. These prices are already very low as it is.

- Watch China to see if they are able to get the selling there stopped, so far measures taken are not working well

- Watch to see if the global financial institutions (IMF, BIS, World Bank, etc) issue any kind of warnings or comment on the market selloff. So far we have only this from the IMF saying China is not in a crisis.

- Watch the price of gold (falling gold may signal deflation, rising gold may signal a flight to safety). Also watch the dollar in conjunction with gold prices (do both go down?, do both go up? do they diverge with one going up and the other down?, etc.). A move up by both gold and the US dollar is a clear signal of a flight to safety for example.

There are already many people who are predicting some kind of severe economic crisis to unfold in the September and October time frame later this year. Many of these people view this through a religious lense. We can expect that this market selloff will be viewed by them as a sign that things are going to get worse. This is important because there are a large number of people following this idea on the internet. If too many people become convinced, it can act like a self fulfilling prophecy as people take more drastic actions than they would under what they view as normal conditions.

I have reached out to some experts by email to ask if they see this market selloff as just a normal market correction or potentially something worse. So far I have one direct response. 

That response was "a correction (for now)."

Here is Jim Rickards twitter comment: Fed still has 4 options left.

He also said this in his latest article available to those who provide an email address:

"Where’s the snowflake? What is the particular catalyst that triggered this avalanche at this particular time?  The snowflake is Janet Yellen’s inability to grasp the statistical properties of risk, and her dismal forecasting ability based on obsolete Fed models."   . . . . 

Where do we go from here? The best case is that Yellen realizes her blunder, backs away from rate hike talk, and initiates some easing measures. These could include more QE, negative interest rates, a cheaper dollar (more currency wars!), or helicopter money. The worst case is that she persists in the tough talk and markets meltdown around her."

These comments from Jim are in relation to the market selloff that has been ongoing now for several days and not just the big drop this morning.

Nomi Prins twitter comment: "This is why I wrote Cash is King on July 3rd - artificial liquidity can dry in an instant"

If I get more responses or other credible information, I will post it here.

We are already seeing appeals in the mainstream media for people not to panic. That is always good advice. But it does not mean we should not monitor events closely due to the highly interconnected financial system we now have globally. A problem anywhere can lead to a problem everywhere as we have tried to point out here many times. And we know there are trillions of dollars of various kinds of derivatives out there tied to interest rate movements and also market movements. It's always wise to stay informed and even more so when markets are behaving abnormally.

Added note: We are already seeing a theme develop in the western mainstream media. The market rout is "China's fault."  We need to to step back and think about the big picture here. Note that earlier this year China (and the BRICS) started up the AIIB and the BRICS Bank which were widely touted as a challenge to the US/IMF/World Bank. There was considerable media coverage that the US was "embarrassed" when many nations in Europe (including the UK) decided to join the AIIB (over US objections). So, we have to consider the possibility that the effort to blame China could be related to ongoing chess moves between the US and China. It could just be coincidence, but it could also be part of the game.

Jim Grant offers this alternative view of who to blame on CNBC.

Politicians start the blame game.

Cuban blames China, Stephen Roach blames Central Banks

More twitter reaction: 

Rickards on gold

Rickards on conference call with his team at Westshore Funds

Final note 3pm: After an historic day, the US Dow closes down over 580 points and combined with the 530 point drop on Friday has dropped over 1100 points in two days. Volatility is off the charts with intra day swings in the hundreds of points. What we are seeing here is basically the complete opposite of systemic stability. Every day is going to be an adventure until we see some kind of market stability.

Sunday, August 23, 2015

Is This the Start of the Crisis?

Readers here know that we have two major questions we are following here:

1) Will we get another major financial crisis worse than 2008?
2) Will the SDR used at the IMF become a global reserve currency?

We have covered this extensively now for many months. We have posted the various systemic risk warnings that have been issued over the last year on a separate blog page

With the substantial drop in US and global markets, it is only natural that people will be wondering if this is the start of the big crisis or just a simple market correction? It's too early to tell of course right now. But we need to keep in mind that if and when we do get another major financial crisis, we are not likely to get any warning and it will could start out in a similar fashion to what we have seen here lately. We also need to remember that because the global system is so interconnected, a problem anywhere can lead to a problem everywhere.

There is just no way to know ahead of time. We have encouraged readers here to have a backup plan in mind in case we do get another major crisis (which is possible at any time).

Below we have some reactions pouring in to the big market selloff we are seeing. It is also worth noting that gold is up against all major currencies in the last 30 days including the US dollar. 
As always, the reader can review the various reactions and decide for themselves what to think. 


CNBC - Dow, Nasdaq Plunge

Bill Holter - "We are Witnessing a Credit Collapse"  - he adds this later

Fox Business - Crushed - Dow Enters Correction Territory

Bill Fleckenstein - Stock Market Plunge Will Accelerate

Bloomberg - Stocks Fall Most in Four Years

CNN Money - Dow Plunges 531 Points

Art Cashin - Prepare for More Downside

CNBC - Jim Cramer - Where is the Fed?

Bob Pisani CNBC - Are we at a Bottom?

AP News - Sinking Currencies in Emerging Economies

Egon von Greyerz - World Headed for Full Blown Panic

Meanwhile - Here is what gold has been doing the last 30 days

Also, whenever you see CNBC promoting a special report entitled "Markets in Turmoil" for viewers on Sunday night for the market opening in Asia, you know people are taking this situation seriously.  Fox Business will also provide special coverage Sunday at 9pm ET.

added note - At the same time as we have world markets on edge, we have some unusual events going on that could add to global tension:

- two major explosions in China (cause unknown)

- ramp up of tension between N. Korea and S. Korea (talks to ease tension underway)

- today a huge explosion (cause unknown) at a US military facility in Japan

added note 8:20 pm: CNBC special report was a non event. No indication that the markets are moving into a crisis mode so far. We'll see how they do on Monday. Bill Holter provides his Sunday night comments here.

added note 10:05 pm: Asian markets are in a pretty sharp selloff right now which has dragged down the US Dow futures quite a bit (down over 300 points right now). We'll check in tomorrow morning to see how it looks.

update 6:15 am (8-24-15) - Chinese market falls 8% and US futures look to open sharply down. We need to watch for markets tripping so called circuit breakers and also to see if any markets are closed. Here is update on CNBC.

Bloomberg - More than $5 Trillion lost in Equity Markets since August 11

Update 8-26-15 (3pm): US Market finally has a strong up day. It's still too early to tell if we are seeing the start of the crisis yet. All this volatility (both up and down) is the opposite of systemic stability and it could be weeks before we know what we are seeing.

Update 8-27-15 (9am): Markets seem to be stabilizing now. Jeffrey Saut of Raymond James offers this more optimistic view of the market on King World News.